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Initial Win for Corporation in Trade Agreement Attack on Environmental Policy Poses Complications for Obama Administration as It Tries to Revive Korea FTA

WASHINGTON, D.C. – An international tribunal’s decision to allow a controversial suit against El Salvador under the 2005 Central America Free Trade Agreement (CAFTA) will fuel demands by many in Congress that the Obama administration alter the foreign investor terms in three North American Free Trade Agreement (NAFTA)-style trade pacts inherited from the George W. Bush administration and new pacts under negotiation, Public Citizen said today.

“The fact that an attack like this would even be possible highlights what is wrong with our current trade agreement model,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. “The same crazy investor rights are in Bush’s leftover trade deal with Korea that President Obama wants to move forward. Unless they fix Bush’s deal, the hundreds of Korean firms operating here would get new rights to skirt our court system and laws and use foreign tribunals to demand taxpayer compensation for laws that they do not like, just like Pac Rim is doing to El Salvador.”

This month, the Obama administration must decide how to proceed with Bush’s leftover Korea-U.S. Free Trade Agreement (FTA), which contains the same CAFTA special rights for foreign investors and private enforcement of them through “investor-state” tribunals. A CAFTA panel for another mining-related investor challenge brought against El Salvador by Milwaukee-based Commerce Group for $100 million was constituted a few weeks ago.

“Today’s ruling just provides another reason why a bipartisan majority of Americans oppose the Bush NAFTA-style trade model and expect President Obama to deliver on his campaign commitments to replace it,” Wallach said.

The CAFTA ruling issued today from the International Centre for the Settlement of Investment Disputes (ICSID) rejected the Salvadoran government’s preliminary objections, which could have led to the dismissal of Canadian-based Pacific Rim’s CAFTA claim. The mining firm is demanding hundreds of millions of dollars in compensation from the government of El Salvador over a dispute about a large gold mine with cyanide ore processing that the corporations sought to operate. The firm never completed the process to obtain a permit to operate the mine and filed its CAFTA case in 2008.

The same provisions in CAFTA that allow multinational corporations to challenge domestic environmental and public health regulations in private, foreign tribunals are also found in the Korea FTA. Obama has called on his negotiators to fix outstanding issues with the Korea FTA, saying that he wants to bring the pact – negotiated by the Bush administration – to Congress for a vote by early next year. However, to date, the administration has stated that it intends only to remedy market access issues for U.S. autos and beef. Labor unions and other civil society groups, as well as many members of Congress, are opposed to the Bush Korea FTA text and have demanded that the extraordinary investor rights and their private enforcement be removed. There are currently 85 Korean-owned multinational companies with about 270 establishments in the United States that would be newly empowered under the Korea FTA to challenge U.S. policies in foreign tribunals if the pact went into effect. There are also hundreds of U.S. firms operating in Korea that could use the same system to attack Korean public interest laws.

The case is being prosecuted under extremely controversial CAFTA provisions that grant foreign investors expansive new rights to sue governments in foreign tribunals over regulations or government actions that conflict with the pacts’ special rights for foreign investors and that could undermine their future expected profits. These terms are included in all three of the Bush-signed but unapproved trade agreements with Panama, Colombia and Korea that the Obama administration inherited.

El Salvador invoked CAFTA Articles 10.20.4 and 10.20.5, which provide for a preliminary objection to investors’ claims to protect governments from frivolous, but costly, trade pact investor suits. Under these provisions, a challenged government may request an early dismissal of the claims before a full hearing is allowed to proceed. In application, however, these provisions provided no protection for El Salvador, and the case will move forward, likely costing one of the hemisphere’s poorest countries millions of dollars to defend its mining safety policy even if the government succeeds.

Pacific Rim Mining Corp., a Canadian-based multinational firm, sought to establish a massive gold mine with cyanide ore processing in the basin of El Salvador’s largest river, Rio Lempa. With growing opposition to the mine over its health and environmental implications, the firm never completed the feasibility study necessary to obtain an operating permit for this project, known as El Dorado. In December 2007, a subsidiary of the Canadian firm based in the Cayman Islands reincorporated in Nevada under the name Pac Rim Cayman LLC. Four months later, the new U.S. subsidiary sent a letter to the Salvadoran government threatening a CAFTA claim. In July 2008, the firm ceased exploratory drilling at El Dorado. In December 2008, the firm formally launched a CAFTA claim.

Communities in northern El Salvador that would have lived with environmental and public health impacts related to the mine joined with religious, environmental and human rights groups to raise concerns. El Salvador, the size of Massachusetts, has a population density of 800 people per square mile, severe environmental degradation and surface water contamination. With gold prices soaring, 29 permits have been filed in El Salvador for new mines. The Salvadoran government has convened a Blue Ribbon Commission to review the country’s mining policy.

“Each stage of this case reignites the debate about trade pacts’ threats to the environment and public health and reminds people that President Obama promised during his campaign to fix this very problem,” Wallach said. “It also shines a spotlight on whether he will deliver on that promise as he takes up the Korea trade deal.”

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